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The S&P 500 was down almost six percent last week and is now eight percent from the high set on January 3. While stock declines are never any fun, the S&P 500 has typically fallen almost fifteen percent intra-year annually. Despite these inevitable intra-year scares, stocks have been higher in forty out of the last fifty-two calendar years.

Even with the recent decline, stocks remain expensive historically on an absolute basis. However, stocks are inexpensive relative to bond yields. Rather than speculate in the short-term movements of prices, which is a fool’s errand, looking at the long-term performance of various asset classes can provide some guidance here.

Rather than the typical investment definition of risk, which measures the volatility of prices, long-term investors should focus on keeping and, better yet, growing purchasing power. Increasing purchasing power involves investing in assets that rise in value quicker than inflation over time. Stocks have provided the highest return since 1928 but have also been subject to the most significant short-term declines.


Stocks have provided the highest annualized after-inflation, also known as real, returns since 1928. In the post-financial crisis era, government bonds have made a meager return over inflation, while cash has lost purchasing power at a quick clip. With inflation running at 7% and likely to stay above 3% in 2022, the 10-year U.S. Treasury at 1.75% and cash at close to 0% seem destined to produce negative real returns. BAA corporate bond yields at 3.6% could outpace inflation, but not at levels near history.

Cash, government bonds, and corporate bonds have never had a negative annualized return over ten-year rolling periods, while stocks have had nominal losses in some 10-year periods. In addition, stocks have lost as much as forty-four percent in one calendar year. Interestingly, when looking at investments through the long-term lens of purchasing power, cash and government bonds have seen more significant declines than stocks! For example, the U.S. 10-year Treasury bond lost thirty-nine percent of its after-inflation value between 1972 and 1981.

Given the long-term history and the current inflation environment, stocks should play an essential role for long-term investors focused on retaining purchasing power. Some allocation to bonds and cash remains appropriate for most families, though. High-quality bonds and cash can provide the cash flow and stability to meet liabilities in the short term, while stocks are just too volatile to be counted on to meet near-term needs. Stocks can certainly decline further, but any pullbacks are likely destined to be an opportunity once enough time has passed. Investors should expect more moderate stock returns going forward, given current valuations and the headwinds from rising yields, though.

Source: Forbes

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